With Trump, the US foreign policy framework is at risk

America has been a voice for liberty, open doors and leader of the free world

by: Robert Zoellick

Now that president-elect Donald Trump has selected his national security team, what course will he set? In a recent interview Henry Kissinger, the US secretary of state in the 1970s, cautions that “America has conceived of foreign policy as a series of discrete challenges to be addressed as they arise on their merits rather than as part of an overall design”. Mr Trump, the deal-by-deal negotiator, may prefer to run a case-by-case foreign policy.

For 70 years, US international problem-solving has taken place within the framework that the US created after the second world war and then adapted. That framework is now at risk. States created in the Middle East in 1916 have broken down into a life-and-death struggle among sects and tribes, manipulated by local would-be hegemons. The new battleground supplies a cause and base from which radical Islamic terrorists reach around the world. The chaos has triggered a destabilising migration to the EU. Furthermore, countries in the region — Egypt, Saudi Arabia, Iran — have struggled unsuccessfully to transition to modern market economies, raising the risk of an even larger upheaval.

The European integration project that has been the foundation of transatlantic strategy since the Marshall Plan is fragmenting. Neither Britain nor the EU has a constructive plan for Brexit. Fearful populist-nationalists in eastern Europe recall destructive movements of the 1920s and 1930s. The eurozone is struggling. Even stalwarts of the European project, such as the Netherlands and Italy, are losing faith.
Seizing opportunities, Russia has extended its power in the Middle East and Europe with a mix of military force, brute threats, cyber attacks and disinformation. President Vladimir Putin wants to protect Russia’s southern flank from Islamic dangers, repel European influence and constrain the US within a system of competing powers.

The strategic question in Asia is whether China will demand regional dominance or an adaptation of the current order to reflect Beijing’s power and interests. Mr Kissinger believes that China’s preferred system is one of tributary states. President Xi Jinping moved promptly at the summit of the Asia-Pacific Economic Cooperation forum to fill the vacuum created by Mr Trump’s abandonment of the US-led Trans-Pacific Partnership.

The world is highly alert to signals from the US. Before long, Mr Trump and his team will be tested by crises, as all presidents have been. Their responses need to reflect a strategic framework of US interest and leadership.

History offers insights. First, the US needs continental security. In the 19th century, the US expanded its territory to assure safety. For the past 80 years, since Franklin Delano Roosevelt’s “Good Neighbor Policy”, the US has worked to build a stronger North America with Canada and Mexico — as a continental base for global power projection.

Second, the US relies on strong, resilient and confident alliances across the Atlantic and Pacific.

These ties enable the US to safeguard interests on the western and eastern shores of the vast Eurasian expanse. Nato and the evolving Pacific alliance network encompass America’s closest partners. The US also enjoys special ties to Israel and states in the Gulf, and has been building a partnership with India.
Third, America needs to modernise international economic ties to advance both national interests and global growth. The US needs rules on trade, capital flows, investment, exchange rates, the digital economy and intellectual property that will enable America’s private sector dynamism to shape the world’s economic system.

Fourth, the US should be alert to changes in the western hemisphere, in concert with Latin American friends. Since the 1820s, the US vision of a New World of republics that can shape the Old has waxed and waned. In coming years, new leadership in Brazil and Argentina offers opportunities. Cuba and Venezuela are also ripe for change.

Fifth, the US needs to invest in superior military punch and technology, while following Theodore Roosevelt’s guidance on defence diplomacy: “Speak softly and carry a big stick.”

Finally, history recounts how the American Experiment became American Exceptionalism.

Across different eras, the US has stood as a “Shining City on the Hill”: an architect of open doors for private sector initiative, a voice for liberty and human rights and the leader of the free world.

Amid the uncertainties of this new era, the Trump administration will need to match power with purpose. Mr Kissinger observed: “Trump has not put forward a worldview.” Now is the time.

The writer is a former president of the World Bank, US trade representative and deputy secretary of state

The Age of Hyper-Uncertainty

Barry Eichengreen

 Pro-Europe supporters in front of UK supreme court

BERLIN – The year 2017 will mark the 40th anniversary of the publication of John Kenneth Galbraith’s The Age of Uncertainty. Forty years is a long time, but it is worth looking back and reminding ourselves of how much Galbraith and his readers had to be uncertain about.
In 1977, as Galbraith was writing, the world was still reeling from the effects of the first OPEC oil-price shock and wondering whether another one was in the pipeline (as it were). The United States was confronting slowing growth and accelerating inflation, or stagflation, a novel problem that raised questions about policymakers’ competence and the adequacy of their economic models. Meanwhile, efforts to rebuild the Bretton Woods international monetary system had collapsed, casting a shadow over prospects for international trade and global economic growth.
For all these reasons, the golden age of stability and predictability that was the third quarter of the twentieth century seemed to have abruptly drawn to a close, to be succeeded by a period of greatly heightened uncertainty.
That’s how things looked in 1977, anyway. Viewed from the perspective of 2017, however, the uncertainty of 1977 seems almost enviable. In 1977, there was no President Donald Trump.
Jimmy Carter may not go down in history as one of the best US presidents, but he did not threaten actions that placed the entire global system at risk. He did not turn his back on America’s international commitments such as NATO and the World Trade Organization.
Nor did Carter go to war with the Federal Reserve or pack its board with sympathetic appointees willing to sacrifice sound money to his reelection prospects. On the contrary, he appointed Paul Volcker, a towering pillar of monetary stability, as chairman of the Board of Governors. And although Carter did not succeed in balancing the federal budget, he didn’t blow it up, either.
Whether Trump slaps a tariff on Chinese goods, repudiates the North American Free Trade Agreement, packs the Federal Reserve Board, or undermines fiscal sustainability remains to be seen.
Conceivable outcomes range from mildly reassuring to utterly catastrophic. Who knows what will happen? By today’s standards, Carter was the embodiment of predictability.
In 1977, moreover, the prospects for European integration were rosy. Denmark, Ireland, and, most notably, the United Kingdom had recently joined a rapidly growing European Community. The EC was attracting members, not losing them. It was a club that countries sought to join precisely in order to achieve faster economic growth.
Moreover, to buttress its common market, the EC had just established a regional monetary system, the suggestively named “snake in the tunnel.” While this was far from a perfect monetary system, it had one very positive attribute: countries could leave in hard economic times, and rejoin if and when the outlook brightened.
In 2017, in contrast, negotiations over Brexit will continue to cast a dark cloud of uncertainty over the European Union. How those negotiations will proceed and how long they will take are anyone’s guess. Moreover, the main questions raised by Britain’s decision to leave – whether other countries will follow and, indeed, whether the EU itself has a future – remain far from resolved.
Meanwhile Europe’s monetary house remains half built. The eurozone is neither appealing enough to attract additional members nor flexible enough to grant troubled incumbents a temporary holiday, in the manner of the currency snake. The euro will likely survive the year, inertia being what it is. Beyond that, it is difficult to say.
In 1977, uncertainties emanating from emerging markets were not on commentators’ radar screens. Developing countries in Latin America and East Asia were growing, although they depended increasingly on a drip feed of foreign loans from money-center banks. China, still largely cut off from the world, did not figure in this discussion. And even if something went wrong in the Third World, developing countries were simply too small to drag down the global economy.
The situation today couldn’t be more different. What happens in China, Brazil, or Turkey doesn’t stay in China, Brazil, or Turkey. On the contrary, developments in these countries have first-order implications for the world economy, given how emerging markets have accounted for the majority of global growth in recent years. China has an unmanageable corporate-debt problem and a government whose commitment to restructuring the economy is uncertain.
Turkey has a massive current-account deficit, an erratic president, and an unstable geopolitical neighborhood. And if political scandals were export goods, Brazil would have a clear comparative advantage.
Although The Age of Uncertainty was about much more than the year 1977, it captured the tenor of the times. But if Galbraith were writing the same book in 2017, he probably would call the 1970s The Age of Assurance.

A Geopolitically Significant Price for Oil

We do the math on the oil price Russia needs to be sustainable.

By Jacob L. Shapiro

We published our 2017 forecast earlier this week, and one of our predictions is that Russia is in for a difficult year economically. This is because Russia’s economy depends significantly on oil.

The price of oil thus far in 2016 has averaged roughly $34.39 a barrel, a far cry from just two years ago, when oil prices were more than double that figure. According to Russia’s Federal Customs Service, oil-export revenue accounts for 26 percent of total revenue from Russian exports. For an economy in which exports make up almost 30 percent of GDP, that is fairly significant.

Russia has already seen this problem manifest in its ballooning 2016 budget deficit. The budget deficit was $25 billion in 2015, or 2.6 percent of total GDP, according to Russia’s Finance Ministry. But Russia’s finance minister said last September that 2016 budget deficit projections had been revised upward, potentially reaching 3.7 percent of Russia’s GDP by year’s end. This is the reason Russia has been dipping into reserve funds and slashing social services and pension benefits across the board. 

Russia Reserve Fund and Oil

A great deal of ink has been spilled over the rise in oil prices since the Organization of the Petroleum Exporting Countries (OPEC) agreed to production cuts on Nov. 30. Leaving aside that oil has not actually surged upwards – the price for Brent crude at closing on Dec. 14 was only 11 percent higher than on Nov. 28 – instead of speculating on the gyrations of the market it is more interesting to figure out the exact oil price that would be geopolitically significant from Russia’s point of view. Russia’s finance minister said last January that Russia could balance its budget if oil reached $82 a barrel, but we have a doctrinal distrust of politicians’ statements, so we wanted to see if we could discover a similar figure – or a more accurate one – on our own.
Russia reports oil-export revenue in both metric tons and dollars. According to Russia’s Federal Customs Service, from January to October 2016, Russia exported $59.6 billion worth of oil, or approximately 213 million metric tons of crude. Converting metric tons to barrels for crude oil is not simple, as each type of crude differs in density; the generally accepted conversion rate for metric tons to barrels is 7.33 (according to BP’s Statistical Review of World Energy). By analyzing Russia’s export statistics this way, it is possible to make two observations. One is that in the first 10 months of 2016, Russia produced almost 5 percent more oil than it produced in all of 2015, which means it needed to sell more this year than the previous year. The other is that we can roughly estimate that Russia thus far this year has exported approximately 5.13 million barrels of oil per day.

From here we have to make a bit of a leap. Russian statistics show that Russia exported $76.7 billion of oil in 2015, when the average price was $41.85. With data from just the first 10 months of 2016, we have to do a little guesswork. But let’s assume for the sake of argument that in November and December of this year, Russia will have exported the average value it exported in the first 10 months of the year (in reality it probably will be a little more), meaning that total Russian oil exports in 2016 will be approximately $71.52 billion. We also must factor in recent comments by Russia’s energy minister that indicate Russia has, at least verbally, agreed to coordinate its oil production with OPEC’s cuts by reducing production by 300,000 barrels per day (bpd) in 2017. We’ll leave the details of when this cut will be implemented (or whether it actually will be implemented) for another time. For now, if we assume that all of that production is removed from Russia’s average production next year, we conclude that Russia will export roughly 4.8 million bpd of oil next year.

Russia oil
The Kremlin is reflected in the polished company plate of state-controlled Russian oil giant Rosneft in Moscow. DMITRY KOSTYUKOV/AFP/Getty Images
As stated above, Russia expects to run a budget deficit of $48.1 billion in 2016. If Russian oil exports are valued at $71.52 billion in 2016, that means Russia would have to export $48.1 billion more oil in order to break even just on its budget deficit. When you do the math, that comes out to approximately $68 a barrel, assuming daily production of 4.8 million barrels. That is a little lower than Russia’s finance minister suggested earlier in the year, but that is not overly surprising. The State Duma in Russia recently approved next year’s budget, and parts of it, such as certain types of defense spending, are not publicly reported.

The finance minister may know of other costs that must be factored in that we don’t, or he may simply have wanted to lower expectations.      
What this means is that Russia needs oil prices to increase by about 30 percent from the current position just to break even on the budget. Even that much of a rise would not solve Russia’s economic problems. It would only mean that Russia would be able to continue current levels of spending – which already include cuts to various social services – without having to dip into various reserve funds. Russia’s Finance Ministry has already indicated it expects one of those funds to be spent covering the budget deficit in 2017, which Russia expects to slightly decrease to 3 percent of GDP.

A significant increase in oil prices in 2017 at this point seems unlikely. The market is oversupplied, growth projections for major economies in the world are stagnant at best, and the higher the price increases, the more likely it is that the United States will increase production. OPEC and other oil exporters participating in production cuts may be able to make a dent in oversupply (assuming they break historical precedent and don’t cheat on the quotas), but they won’t be able to solve the problem entirely nor prevent other countries from increasing their own production. Getting caught up in the swings of the market can be addictive, and since we care about such things because of what they will mean geopolitically, we discipline ourselves as much as we can. The above logic shows why oil prices would have to be maintained over at least $68 a barrel for a sustained period before we start getting too excited.

sábado, diciembre 24, 2016



Forecasting Russia in 2017

By George Friedman and Jacob L. Shapiro

One of the biggest challenges in writing forecasts is clearly communicating our predications for the coming year. There is a certain level of background and analysis that goes into forecasting geopolitics, but often, that background and analysis can serve as either an intellectual crutch or a way of using a lot of words without actually making a call one way or another.
That’s why our annual forecasts go through multiple phases of editing. Our forecast for 2017 was published just this week. But our work on the forecast began in early October, with a massive 50-page document filled with questions, research, and findings. This master document was then scrutinized, debated, and whittled down, sharper and sharper… until what was left (hopefully) was a concise description of the world in 2017, as we see it.
We aim for accuracy, and as you can see from previous report cards on our work, we are pretty good at what we do. Our full report card for 2016 will be published next week, but in the meantime, subscribers can check out our mid-year evaluation here.
But another aim that is almost as important is to be very clear about what we are forecasting. We would rather be wrong and have made a clear forecast than offer a vaguely worded “prediction” that is unfalsifiable.
Therefore, we spend less time explaining how we arrived at a given conclusion, and more time clearly stating what we think is going to happen and how that will shape the world. A forecast is not an analysis—it is the culmination of analysis. That means that a certain amount of information about how we arrived at a particular forecast is always left out. If it weren’t, the forecast would read like a volume of Tolstoy, and no matter how brilliant Tolstoy was, his writing style is not well suited for forecasting.
We’ll kick off this series by looking at the current situation in Russia, which we believe is in for a difficult year.
Russia’s Military Capability
We began the forecasting process with Russia by looking at the country’s military capability. Russia has intervened in Syria to great fanfare, and while it has demonstrated undeniable improvements in some of its capabilities, the Russian military is far weaker than most make it out to be. Our 2016 forecast predicted a frozen conflict in Ukraine, and we came to the conclusion that this frozen conflict will be formalized in 2017 by answering a very basic question: What is the Russian military capability in Ukraine and in general?

The answer is found not by looking at events pertaining to the Ukrainian revolution in 2014, but rather the performance of the Russian military in the 2008 Georgia War. Russia achieved all of its strategic objectives in that five-day war, but serious deficiencies in Russian capabilities were revealed. Operational and tactical logistics left much to be desired, as the Russians had serious difficulties maintaining supply lines for food, fuel, and ammunition. Much of Russia’s military equipment was old and falling apart, Russian suppression of enemy air defenses (SEAD) and electronic warfare capabilities were deficient, and use of precision-guided munitions was rare.
Joint operational planning between different services was either nonexistent or ineffective.

After the war, Russia set out on an ambitious and vast military modernization program, reforming everything from doctrine to training to weapons. Russia set clear goals for reducing the number of conscript soldiers to professionalize the force. The 10-year State Armaments Program, announced by President Vladimir Putin in 2010, allocated 19.4 trillion rubles (worth $698.4 billion at the time) to revamp the equipment and weapons used by the Russian armed forces, and Russia’s military expenditures have been increasing both in absolute terms and as a percent of Russia’s GDP ever since.

Russia has taken some impressive steps forward. In 2008, it is unlikely Russia could have fielded a force and deployed it in Syria as it did in 2015. Of all the weapons Russia used in Syria, roughly 20% have been precision-guided munitions, which shows progress… but it also shows how much room Russia has to grow. Russia has deployed unmanned aerial vehicles to help with intelligence gathering, and both SEAD and joint inter-service operations have improved. According to Russian military officials, conscripts in the military have been reduced from roughly 600,000 in 2011, to 200,000 by the end of 2016.

These improvements and the media campaign around the Russian intervention, however, obscure the two most important elements to consider in evaluating the Russian military.
First, despite these improvements, Russia has neither the military capability nor the political capital to conquer Ukraine, even if it wanted to. Russia beat Georgia because Georgia is a small country and Russia could overwhelm the Georgians with larger numbers. Ukraine is eight times the size of Georgia in terms of total land and can field a much larger infantry force. Many of Russia’s Rapid Reaction Forces that would be mobilized in such an action still consist of significant numbers of conscripts. Even if Russia could blitz its way to Kiev, it couldn’t hold the country, considering the long supply lines and Ukraine’s large, hostile population. And if the US or NATO decided to intervene, Russia would require even greater forces.

Second, Putin and the Russian government are aware of these limitations. Since 2008, they have been doing everything possible to modernize the Russian armed forces and to reach, if not parity, then a level of strength that could give them more strategic options.
That has meant increasing military spending.

While Russia was flush with oil money, that was a perfectly logical plan. But Russia was not expecting oil prices to collapse in 2014. Russia had planned a budget on the then-conservative estimate that oil wouldn’t fall below $82 a barrel. Oil has averaged between $34 and $35 a barrel in 2016, and there’s no reason to expect the oversupplied market to give Russia significant relief in the coming year. Modernizing Russia’s forces is one of the top priorities for the government in the next three years, but it’s not clear if Russia has the money to spend.
The Russian Economy
The main issue for Russia in 2017 is not going to be a military one. Russia does not want to get bogged down in Syria, so it will be looking to extricate itself from that conflict. Russia cannot fix its Ukraine problem through force, so it will try to reach a settlement that will allow the status quo to remain in place. As long as Kiev remains neutral and not a basing point for major US and NATO assets, the Russians will be content, though uncomfortable. The problem for Russia is that its economy is in a shambles, and it is trying to pour money into modernizing the military at the same time that disturbing cracks in the Russian economy are beginning to show. Let’s look at two graphics that demonstrate just how challenging the current situation is.
This is a simple chart of the exchange rate between the ruble and the dollar in the last five years. Since July 2014, the ruble has lost almost 50% of its value. In 2010, Putin promised to spend 19 trillion rubles on upgrading the Russian military, which was equivalent to almost $700 billion at the time. Today, 19 trillion rubles is worth only $303 billion. Real wages have been declining since 2014. Inflation, at this time last year, was almost 13%, and though it has stabilized around 6% in recent months, the ruble is still under a lot of pressure.
This graphic shows the current state of Russia’s regional budgets, and the picture is not pretty. Major oil-producing regions as well as Moscow are doing all right, but large swaths of the rest of the country are running regional deficits. The central government in Moscow is also struggling, reportedly cutting all federal ministry budgets by 10%. While spokesmen in Russia’s Defense Ministry have said that defense spending will be cut by 5%, this is impossible to confirm because some parts of the Russian budget are classified and those defense expenses are likely hidden. Russia’s Ministry of Finance says that Russia’s Reserve Fund (which totaled 28.6 billion rubles in 2008) will be fully spent by the end of 2017 and that the country will start dipping into its National Wealth Fund to cover its budget deficits.

In addition to these larger indicators, we have seen disturbing smaller indicators of a struggling economy. A few weeks ago, protests occurred in one oil-producing region in Ural Federal District due to economic dissatisfaction, and in another region due to unpaid wages and malfunctioning heating equipment shortly before winter came in earnest. Russia has been shutting down banks at an increasing rate and blaming them for irresponsible lending practices.
This has prompted over 2.7 million more people to apply for deposit insurance in the last five years than the previous five years, which could be a sign that the banking sector is under severe pressure.
The Forecast
These are the basic building blocks, and once they were identified, the forecast essentially wrote itself. Having defined Russian military capabilities, we were able to identify Russia’s political and strategic objectives in Ukraine, Syria, and elsewhere in the year ahead.

You’ll read in detail in The World in 2017:

  • Why the International Monetary Fund is wrong predicting that the country is on the upswing

  • The trends that are telling us the Russian economy hasn’t yet hit rock bottom

  • Two economic challenges that could push Russians over the edge… and contribute to the country’s collapse by 2040

  • What it all means for Russia’s international relationships and actions in the year ahead

  • How these events will affect other key players on the world stage in 2017—and why you need to know about it